Certainty for some, uncertainty for others

Contact: Thejeswi Venkatesh

Despite a few high-profile acquisitions recently, some companies have trouble finding buyers. For instance, STX pulled out of contention for Hynix Semiconductor, citing market uncertainties. This was the third time in as many years that the creditors-turned-owners of Hynix, whose revenue mix consists of more than 70% DRAM and about 25% NAND flash, have tried to unburden themselves of their stake. Hynix now has just one suitor, SK Telecom, a dynamic that probably won’t help the company’s sale price.

The fact that STX is walking away isn’t surprising, given the erosion of business at Hynix. In a recent filing, Hynix indicated that its revenue in the recent quarter declined 16% to $2.4bn on a year-over-year basis. The company reported that DRAM sales will further decline due to falling PC sales although Flash, used in all mobile phones, will see a moderate increase. Hynix’s primary competitor, Micron Technology, also saw a decline in sales and is currently trading at less than 1 times sales and a paltry 1.8x trailing EBITDA. Both Micron and Hynix operate at a gross profit in the mid-20% range. (To put things in perspective, Qualcomm runs at an overall profit margin of 30%.)

Of course, these travails are not limited to the tech sector. Cerberus Capital Management and a partner recently withdrew their bid for Innkeepers USA, a hotel chain operator, also blaming market uncertainties. The two sides are currently fighting it out in court over whether the buyout shop and its partner has to hold to its plan, or whether there has been a ‘material adverse change’ that lets the would-be buyers walk away from the deal.